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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com.
In anticipation of a transition, dental practice sellers should learn what a potential buyer is looking to see during this current environment.
In today’s environment, the coronavirus disease 2019 (COVID-19) pandemic may have caused problems with the physical and mental health of the individual dentists, their staff and patients. The current valuation of the dental practice may be misleading because of a decreased volume of gross revenue in the last year and a lower valuation being presented.
In this article, we’ll take a look at dental practice valuations and learn about what buyers look for when considering purchasing a practice.
Good evaluators will let those reviewing the report for a potential purchase see the past financial performance but also understand about the trending of the current revenue results that may or may not be part of the valuation’s history under review. Strong positive language and projections about the situation beyond the years included in the valuation will assist the buyer and seller in comprehending the actual value of the dental practice under consideration for the transition. A look at the year on an upward trend in months listed plus the year will let those looking at the valuation see that the trend of gross revenue is up and the continued results will reflect a 12-month period that is higher than the past.
If the current year’s financial information is not available in final form, a 12-month quick books or similar report will be extremely helpful for the buyer and the seller. Of course a note about the presentation of non-finalized information would be included so that those interested in seeing the valuation understand at what they are looking. Let’s review some of the dental practice sales that have occurred during this pandemic and see what has transpired and what the valuations have offered for potential buyers in terms of a fair market value approach.
What Has Occurred with Values over the Past Year in Terms of Dental Practice Transition Prices?
Some may find the actual sale prices at an upward trend hard to believe based on what happened with the turmoil of the virus at its outset. Many thought that dental practice sales would either stagnate or take place at bargain basement prices. There were quite a few dental practices that actually had increased valuation results as their gross revenues did not fall but were better or similar than in previous years. There were a number of reasons for this. Some of the dental practices that maintained as much communication with patients as possible devised ways for treatment of those patients. A lot of dental practices closed early into the virus’ descent upon the world. Patients from those offices sought a dental practice they could go to for continuing oral health care and office safety. Marketing the dental practice so prospective patients knew where to go and what to expect allowed the office that remained available to let the public know that they did have a place to go. Besides advertising the existence of the office for service, the ability to let current and new patients know of the measures taken to control the sanitization of the office was a big draw as well to those worried about being exposed to possible contagion. All of this cost a lot of money and also required a huge amount of confidence in the dentist and his or her staff. It was about not just the survival of the office, but the continued upswing or stabilization of the results of its operations. The government offering loans, many of which had no recourse to the borrowing owners, came later but assisted greatly for those offices that stayed open.
What about Financing the Acquisition Price? What are the Lenders Looking for in their Review of the Valuation?
The worth of a dental practice valuation for a transition is only as good as the lender’s view of what the dental practice is worth to it for the purpose of securing its loan. Many of the transitions during 2020 transpired where the seller had to finance part of the transition as the lenders had concerns about the long term results. Also, quite a few practices transitioned with “earn outs,” where the buyer and seller agreed to the results over a period of time rather than a one-time price cash price at the settlement of the transition.
This allowed the buyer and seller to agree on a model that gave each something for protection as the final price rose as the value increased and dropped if the performance was not there. This gave the seller his or her price if future performance allowed it and protected the buyer if the results of future operations were not acceptable. There were many acquisitions where the financing was at the same loan to value as in the past before the pandemic. These occurred because the dental practice valuation reflected a growing practice in terms of gross revenue and net income on a consistent basis with the past, regardless of the virus and its effect on the dental profession as a whole. These practices that were able to progress were able to receive financing appropriate for their worth according to the lender as well as to the buyer and seller.
Having the lender’s eyes on the valuation with the success in the buyer obtaining financing from that source gave a great deal of confidence to the buyer about the practice. It also justified the valuation’s estimated value for the seller. As the months go on, dental practices are mostly understanding that if they don’t run or hide, their value will be there as they learn to cope and succeed with what is occurring with the physical and mental health of the world as well as the financial health of the country and its consumers.